Just a few weeks ago, Dr Shane Oliver, Head of Investment Strategy and Chief Economist AMP Capital and respected Australian financial commentator, shared some of the most important investment learnings he’s gained over his extensive 35-year career in the industry. Here are our top picks from Shane’s list plus his Nine Keys to Successful Investing.
It pays to be optimistic
The well-known advocate of value investing Benjamin Graham observed that “To be an investor you must be a believer in a better tomorrow.” If you don’t believe the bank will look after your deposits, that most borrowers will pay their debts, that most companies will grow their profits, that properties will earn rents, etc then you should not invest. Since 1900 the Australian share market has had a positive return in roughly eight years out of ten and for the US share market it’s roughly seven years out of ten. So getting too hung up worrying about the next two or three years in ten that the market will fall risks missing out on the seven or eight years out of ten when it rises.
There is always a cycle
Droll as it sounds, the one big thing I have seen over and over in the past 35 years is that investment markets constantly go through cyclical phases of good times and bad. Some are short term, such as those that relate to the 3 to 5 year business cycle. Some are longer, such as the secular swings seen over 10 to 20 year periods in shares. Some get stuck in certain phases for long periods. Debate is endless about what drives cycles, but they continue. But all eventually contain the seeds of their own reversal. Ultimately there is no such thing as new eras, new paradigms and new normal as all things must pass. What’s more share markets often lead economic cycles, so economic data is often of no use in timing turning points in shares.
What you pay for an investment matters a lot
The cheaper you buy an asset the higher its prospective return. Guides to this are price to earnings ratios for share markets (the lower the better – see the next chart) and yields, i.e. the ratio of dividends, rents or interest payments to the value of the asset (the higher the better). Flowing from this it follows that yesterday’s winners are often tomorrows losers – because they became overvalued and over loved and vice versa. But while this seems obvious, the reality is that many find it easier to buy after shares have had a strong run because confidence is high and sell when they have had a big fall because confidence is low. But the key point is that the more you pay for an asset the lower its potential return and vice versa.
Nine Keys to Successful Investing – Dr Shane Oliver
- Make the most of the power of compound interest. This is one of the best ways to build wealth and this means making sure you have the right asset mix.
- Don’t get thrown off by the cycle. The trouble is that cycles can throw investors out of a well thought out investment strategy. But they also create opportunities.
- Invest for the long term. Given the difficulty in getting market and stock moves right in the short-term, for most it’s best to get a long-term plan that suits your level of wealth, age, tolerance of volatility, etc, and stick to it.
- Diversify. Don’t put all your eggs in one basket. But also, don’t over diversify as this will just complicate for no benefit.
- Turn down the noise. After having worked out a strategy that’s right for you, it’s important to turn down the noise on the information flow and prognosticating babble now surrounding investment markets and stay focussed. In the digital world we now live in this is getting harder.
- Buy low, sell high. The cheaper you buy an asset, the higher its prospective return will likely be and vice versa.
- Beware the crowd at extremes. Don’t get sucked into the euphoria or doom and gloom around an asset.
- Focus on investments that you understand and that offer sustainable cash flow. If it looks dodgy, hard to understand or has to be based on odd valuation measures or lots of debt to stack up then it’s best to stay away.
- Seek advice. Given the psychological traps we are all susceptible to and the fact that investing is not easy, a good approach is to seek advice.
Dr Shane Oliver Head of Investment Strategy and Chief Economist AMP Capital
Important note: While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) make no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided.